Discounted present value, Financial Accounting

A player for a Rice team, Jim Jones, is graduating this year and is considering a career in professional sports. The alternative is to work for two years and then attend business school for two more years before taking a job in finance. The professional sports career involves an up-front signing bonus of $500,000 followed by guaranteed salaries over the next ten years of $750,000 per year (in real yearend values starting at the end of the first year). Assume that the professional sports career ends after 10 years, at which time Jim could expect to earn an income of $75,000 per year (in real terms) growing at 1 % per year for the next 30 years. The business career would involve earning $75,000 this year, $78,000 next year, and spending $30,000 per year for the following two years while attending business school (all amounts measured as end of year real values). Upon graduation, however, Jim could expect a starting salary of $140,000 (in year-end values) growing at 7.5% (in real terms) for the next 35 years.

(a) If the appropriate annual effective discount rate is 4.5%, show that the earnings stream associated with the professional sports career has the larger discounted present value.

(b) If Jim desires to maintain a constant level of annual consumption at a discount rate of 4.5%, what would his annual real consumption be?

(c) What financial assets should Jim have at the end of his first year of employment?

(d) How much should Jim have invested the year that he ceases being a professional athlete?

Posted Date: 2/22/2013 4:48:34 AM | Location : United States







Related Discussions:- Discounted present value, Assignment Help, Ask Question on Discounted present value, Get Answer, Expert's Help, Discounted present value Discussions

Write discussion on Discounted present value
Your posts are moderated
Related Questions
How can a person tell whether an entry to an expense account is payment for a legitimate expenditure or a means of concealing a theft of cash?

Vincent Ltd operates solely in Western Australia and the chief operating decision maker has identified five operating segments: Mining, Insurance, Retailing, Manufacturing and Tran

1. Finco is a wholly owned Finnish manufacturing subsidiary of Winco, a domestic corporation that manufactures and markets residential window products throughout the world. Winco h

Q. What are the Organization Expenditures? Organization Expenditures -Costs of organizing a business or trade or for profit activity before it begins active business. A taxpaye

#The ABC Organization Unadjusted Trial Balance As of 31 December 2012 Account Codes Dr Cr Cash 10,789 Furniture and fixtures 60,000 Supplies inventory 8,531 Pledged contributions r

Illustration: Holding company with direct share holding Rain Ltd., Storm Ltd. and Thunder Ltd. are in the business of manufacturing tents. Their balance sheets as at 30 September

Q. What is basic defination of FCA? Yes. FCA is a method of accounting for all financial costs of funds used or committed for municipal solid waste (MSW) services. FCA suggests

Dietz&Dow Industries (DDI) makes an unexpected takeover bid for Hein & Hillgen Instruments (HHI). DDI offers to pay $50 per share of HHI, which represents a 25% premium over the pr

Can you help me balance my account number out

Q. What do you mean by Reasonable Assurance? Reasonable Assurance - Management's assessment of effectiveness of internal control over financial reporting is expressed at the le